Capital allocation trends at Forever Entertainment (WSE:FOR) are not ideal

What early trends should we look for to identify a stock that could multiply in value over the long term? First, we want to identify growth return on the capital employed (ROCE) and a constantly increasing value base of the capital employed. Put simply, such companies are compounding machines, meaning they continually reinvest their profits at ever-increasing returns. However, at first glance Forever entertainment (WSE:FOR) We’re not jumping off our chairs at the direction of yields, but let’s take a closer look.

Understand return on capital employed (ROCE).

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return) in relation to the capital employed in the company. The formula for this calculation at Forever Entertainment is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.18 = 8.8 million zł ÷ (55 million zł – 6.5 million zł) (Based on the last twelve months ended June 2024).

Therefore, Forever Entertainment has an ROCE of 18%. This is a relatively normal return on capital and is around 19% that the entertainment industry generates.

Check out our latest analysis for Forever Entertainment

Historical performance is a good starting point when researching a stock. Therefore, above you can see the measure of Forever Entertainment’s ROCE compared to its past returns. If you want to look at historical returns, check these out free Charts detailing Forever Entertainment’s revenue and cash flow performance.

What does the ROCE trend tell us for Forever Entertainment?

In terms of Forever Entertainment’s historical ROCE movements, the trend is not fantastic. More specifically, ROCE has fallen from 28% over the last five years. However, it looks like Forever Entertainment is investing in long-term growth, because although capital employed has increased, the company’s revenues haven’t changed significantly over the last 12 months. It may take some time for the Company to see a change in returns from these investments.

The bottom line on Forever Entertainment’s ROCE

All in all, while we’re somewhat encouraged by Forever Entertainment’s reinvestment in its own business, we recognize that returns are diminishing. And investors appear hesitant about trends strengthening, with the stock down 11% over the past five years. On the whole, we’re not too inspired by the underlying trends and think the chances of finding a multi-bagger may be better elsewhere.

We noticed that Forever Entertainment carries some risks 3 warning signs (and 1, which is a little concerning) that we think you should know.

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.